Why the poor pay more

THE poorest members of society are paying more for the everday services most people of us take for granted, says a new report.

The National Consumer Council (NCC) is urging the Government to take steps to make financial services more accessible and affordable to the low paid.

It says the poor face a double disadvantage when buying essential goods or services, ranging from loans and credit cards to banking and health products.

Despite having less money to spend, those on a low-income typically pay proportionally more, both to borrow money and to use services.

The main problem, according to the NCC, is that because most utility and financial services providers are commercial operations, they target the most lucrative customers. Because the poor are seen as a greater risk than those with more money, there is little incentive to cater for them.

The NCC adds: 'Lack of money isn't the only problem with being poor - life on a cash budget is also more expensive.'

One example of this is that people on lower incomes are often refused bank accounts. Without one, they miss out on the discounts offered for paying by direct debit. The Department for Work and Pensions says consumers can save an average of £72 a year in electricity, gas and telephone charges in paying by this method.

The lack of a bank account also means that households organise their money on a cash basis. Typically they have no savings, and no access to credit cards or loans. Any unexpected costs can easily tip them into debt.

The problem is further compounded by the fact that many of those affected do not have the skills or confidence to make use of internet or call centre services. The upshot is that they have no way of comparing products or finding good advice.

It is also easy for poorer people to find themselves forced to pay sky-high rates for credit. Door-to-door Moneylenders such as Provident Financial target customers who wouldn't normally be eligible for a credit card, and charge extortionate interest rates for the privilege.

In May, Vanquis Bank, a subsidiary of Provident Financial, began marketing a card with an effective interest rate of 64.9%.

The NCC's initiative outlines less expensive solutions that are available. These include credit unions, or 'people's banks', that offer savings facilities and low-cost loans to the less well off. The customers of the union are all members that save into a common fund, and all profits made are passed onto members in the form of better interest rates. Members also benefit from free life insurance, while dividends for savers are often higher than High Street rates.

The Government is also encouraging banks to offer basic accounts for people who want to save, including urging banks to train staff to accept alternative forms of identification.

For example, benefits books can be used instead of a passport, driving licence or utility bills.

Since April 2003 the Post Office has offered card accounts for people on benefits.

The Government is hoping that the trustworthy image of the Post Office in comparison to banks will encourage more people to use the existing saving facilities there.